Often times, small business owners find difficulties in obtaining financing for their businesses without putting their personal assets up as collateral. With this, tapping into your home equity is a tempting alternative but should be carefully considered.
In general, interest on debt used to acquire and operate your business is deductible against that business. However, debt secured by your home may be nondeductible, only partially deductible or fully deductible against your business.
Home mortgage interest is limited to the interest on $1 million of acquisition debt and $100,000 of equity debt secured by a taxpayer’s primary residence and designated second home. The interest on the debts within these limits can only be treated as home mortgage interest and must be deducted as part of your itemized deductions. Only the excess can be deducted for your business, provided that the use of the funds can be traced to your business use. This creates a number of problems:
- Using the Standard Deduction – If you do not itemize your deductions, you will be unable to deduct the interest on the first $100,000 of the equity debt, which cannot be allocated to your business.
- Subject to the AMT – Even if you do itemize your deductions, if you happen to be subject to the alternative minimum tax (AMT), you still would not be able to deduct the first $100,000 of equity debt interest, since it is not allowed as a deduction for AMT purposes.
- Subject to Self-Employment (SE) Tax – Your self-employment tax (Social Security and Medicare) is based on the net profits from your business. If the net profit is higher, because not all of the interest is deductible by the business, your SE tax may also be higher.
Example: Suppose the mortgage you incurred to purchase your home (acquisition debt) has a current balance of $165,000 and your home is worth $400,000. You need $150,000 to acquire a new business. To obtain the needed cash at the best interest rates, you decide to refinance your home mortgage for $315,000. The interest on this new loan will be allocated as follows:
New Loan: $ 315,000
Part Representing Acquisition Debt <165,000> 52.38%
Balance $ 150,000
First $100,000 Treated as Home Equity Debt <100,000> 31.75%
Balance Traced to Business Use $ 50,000 15.87%
If the interest for the year on the refinanced debt was $10,000, then that interest would be deducted as follows:
Itemized Deduction Regular Tax $ 8,413 84.13%
Itemized Deduction Alternative Minimum Tax $ 5,238 52.38%
Business Expense $ 1,587 15.87%
There is a special tax election that allows you to treat any specified home loan as not secured by the home. If you file this election, then interest on the loan can no longer be deducted as home mortgage interest, since tax law requires that qualified home mortgage debt be secured by the home. However, this election would allow the normal interest tracing rules to apply to that unsecured debt. This might be a smart move if the entire proceeds were used for business and all of the interest expense could be treated as a business expense. However, if the loan were a mixed-use loan and part of it actually represented home debt (such as a refinanced home loan), then the part that represented the home debt could not be allocated back to the home, and the interest on that portion of the debt would become nondeductible and would provide no tax benefit.
As you can see, using equity from your home can create some complex tax situations. Please contact Dagley & Co. for assistance in determining the best solution for your particular tax situation.
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For the most part, an individual’s travel expenses from attending conventions or seminars can be deducted (provided that attendance benefits the taxpayer’s trade or business). But, the following travel expenses cannot be deducted: family members’ travel expenses, or expenses from attending investment, political, social or other types of meetings not related to the taxpayer’s trade or business. The entire cost of transportation and lodging, plus 50% of the meal expenses, is deductible for meetings held within the North American area. For a detailed list of areas within North America, please consult IRS Publication 463.
Meetings Outside the North American Area – Deducting travel expenses for a convention or meeting outside the North American area has requirements:
- The meeting must be directly related to the taxpayer’s trade or business (whereas meetings within the North American area need only benefit the taxpayer’s trade or business), and
- It must be reasonable to hold the meeting outside the North American area. There is no specific definition of “reasonable” for this purpose, which places the burden of proof on the taxpayer. Considerations include the meeting’s purpose and activities and the location of the meeting sponsors’ homes.
Even if the above requirements are met, the amount of deduction allowed depends upon the primary purpose of the trip and on the time spent on nonbusiness activities:
(1) If the entire time is devoted to business, all ordinary and necessary travel expenses are deductible.
(2) If the travel is primarily for vacation and only a few hours are spent attending professional seminars, none of the expenses incurred in traveling to and from the business location are deductible.
(3) If, during a business trip, personal activities take place at, near or beyond the business destination, then the expenses incurred in traveling to and from the business location have to be appropriately allocated between the business and nonbusiness expenses.
(4) If the travel is for a period of one week or less, or if less than 25% of the total time is spent on nonbusiness activities (on a day-by-day basis), then the travel deductions are treated the same as they would be for travel within the North American area.
Meetings Held On Cruise Ships – When a convention or meeting is held on a cruise ship and is directly related to a taxpayer’s trade or business, the taxpayer is limited to $2,000 per year in deductions for expenses from attending such conventions, seminars, or similar meetings. All ships that sail are considered cruise ships. The following rules also apply:
- The cruise ship must be registered in the United States.
- All of the cruise ship’s ports of call must be in the United States or its possessions.
If you have questions related to the deductibility of expenses from conventions and meetings or from foreign travel, please give Dagley & Co. a call.
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Do you drive for Uber or Lyft, or are thinking of getting into this business? We’ve outlined what it’s like to work for these types of companies, including taxes, expenses, and write-offs:
Uber and Lyft treat drivers as independent contractors as opposed to employees. However, more than 70 pending lawsuits in federal court, plus an unknown number in the state courts, are challenging this independent contractor status. As the courts have not yet reached a decision on that dispute, this analysis does not address the potential employee/independent contractor issue related to rideshare divers; it only deals with the tax treatment of drivers who are independent contractors, using Uber as the example.
How Uber Works – Each fare (customer) establishes an account with Uber using a credit card (CC), Paypal, or another method. The fare uses the Uber smartphone app to request a ride, and an Uber driver picks that person up and takes him or her to the destination. Generally, no money changes hands, as Uber charges the fare’s CC, deducts both its fee and the CC processing fee, and then deposits the net amount into the driver’s bank account.
Income Reporting – Uber issues each driver a Form 1099-K reflecting the total amount charged for the driver’s fares. Because the IRS will treat the 1099-K as gross business income, it must be included on line 1 (gross income) of the driver’s Schedule C before adjusting for the CC and Uber service fees. Uber then deposits the net amount into the driver’s bank account, reflecting the fares minus the CC and Uber fees. Thus, the sum of the year’s deposits from Uber can be subtracted from the 1099-K amount, and the difference can be taken as an expense or as a cost of goods sold. Currently, a third party operates Uber’s billing, coordinates the drivers’ fares and issues the drivers’ 1099-Ks.
Automobile Operating Expenses – Uber also provides an online statement to its drivers that details the miles driven with fares and the dollar amounts for both the fares and the bank deposits.
Although the Uber statement mentioned above includes the miles driven for each fare, this figure only represents the miles between a fare’s pickup point and delivery point. It does not reflect the additional miles driven between fares. Drivers should maintain a mileage log to track their total miles and substantiate their business mileage.
A driver can choose to use the actual-expense method or the optional mileage rate when determining operating expenses. However, the actual-expense method requires far more detailed recordkeeping, including records of both business and total miles and costs of fuel, insurance, repairs, etc. Drivers may find the standard mileage rate far less complicated because they only need to keep a contemporaneous record of business miles, the purposes of each trip and the total miles driven for the year. For 2017, the standard mileage rate is 53.5 cents per mile, down from 54.0 cents per mile in 2016.
Whether using the actual-expense method or the standard mileage rate, the costs of tolls and airport fees are also deductible.
When the actual-expense method is chosen in the first year that a vehicle is used for business, that method must be used for the duration of the vehicle’s business use. On the other hand, if the standard mileage rate is used in the first year, the owner can switch between the standard mileage rate and the actual-expense method each year (using straight-line deprecation).
Business Use Of The Home – Because drivers conduct all of their business from their vehicle, and because Uber provides an online accounting of income (including Uber fees and CC charges), it would be extremely difficult to justify an expense claim for a home office. Some argue that the portion of the garage where the vehicle is parked could be claimed as a business use of the home. The falsity with that argument is that, to qualify as a home office, the space must be used exclusively for business; because it is virtually impossible to justify that a vehicle was used 100% of the time for business, this exclusive requirement cannot be met.
Without a business use of the home deduction, the distance driven to pick up the first fare each day and the distance driven when returning home at the end of a shift are considered nondeductible commuting miles.
Vehicle Write-off – The luxury auto rules limit the annual depreciation deduction, but regulations exempt from these rules any vehicle that a taxpayer uses directly in the trade or business of transporting persons or property for compensation or hire. As a result, a driver can take advantage of several options for writing off the cost of the vehicle. These include immediate expensing, the depreciation of 50% of the vehicle’s cost, normal deprecation or a combination of all three, allowing owner-operators to pick almost any amount of write-off to best suit their particular circumstances, provided that they use the actual-expense method for their vehicles.
The options for immediate expensing and depreciating 50% of the cost are available only in the year when the vehicle is purchased and only if it is also put into business use during that year. If the vehicle was purchased in a year prior to the year that it is first used in the rideshare business, either the fair market value at that time or the original cost, whichever is lower, is depreciated over 5 years.
Cash Tips – Here, care must be taken, as Uber does not permit fares to include tips in their CC charges but Lyft does. Any cash tips that drivers receive must be included in their Schedule C gross income.
Deductions Other Than the Vehicle – Possible other deductions include:
- Cell phone service
- Liability insurance
- Water for the fares
Self-Employment Tax – Because the drivers are treated as self-employed individuals, they are also subject to the self-employment tax, which is the equivalent to payroll taxes (Social Security and Medicare withholdings) for employees—except the rate is double because a self-employed individual must pay both the employer’s and the employee’s shares.
If you are currently a driver for Uber or Lyft, or if you think that you may want to get into that business, and if you have questions about taxation in the rideshare industry and how it might affect your situation, please give Dagley & Co. a call.
April is a busy month for business owners, accountants, accounting departments, CFOs and more. As Tax Day is quickly approaching, plan out your month in advance with these business due dates:
April 18 – Household Employer Return Due
If you paid cash wages of $2,000 or more in 2016 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2015 or 2016 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.
April 18 – Corporations
File a 2016 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 5-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.
April 18 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in March.
April 18 – Corporations
The first installment of 2017 estimated tax of a calendar year corporation is due.
April 18 – Partnerships
Last day file 2016 calendar year fiduciary return or file an extension.
Contact Dagley & Co. with any questions, or if you’d like to schedule your last-minute tax refund meeting.
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At Dagley & Co., we’ve compiled a list of due dates for your business. Contact us at (202) 417-6640 with any questions.
March 15 – Partnerships
File a 2016-calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 6-month extension of time to file the return and provide Schedules K-1 or substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15.
March 15 – S-Corporation Election
File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2017. If Form 2553 is filed late, S treatment will begin with calendar year 2018.
March 15 – Electing Large Partnerships
File a 2016-calendar year return (Form 1065-B) and provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date applies for K-1s even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.
March 15 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in February.
March 15 – Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in February.
March 31 – Electronic Filing of Forms 1098, 1099 and W-2G
If you file Forms 1098, 1099 (other than 1099-MISC with an amount in box 7), or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, January 31 or February 28 was the due date, depending on the form filed. The due date for giving the recipient these forms was January 31.
March 31 – Large Food and Beverage Establishment Employers
If you file Forms 8027 for 2016 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, February 28 is the due date.
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QuickBooks is perfect for many small business accounting departments. There are so many ways within the program to customize for your clients, customers, location, vendors, etc. to really make it your own. “Custom Fields” and “Classes” are two items Dagley & Co. recommends customizing on your QuickBooks Online account.
Start from the Beginning with Custom Fields
You can start working with custom fields and classes at any time. They’re most effective, though, when you build them in as you’re just starting to use QuickBooks Online.
Let’s look at custom fields first. When we refer to “fields,” we simply mean the rectangular boxes in records and forms that either already contain data or that can be filled in by you, either by entering the correct word or phrase, or by selecting from drop-down lists. Most of these are already named. On an invoice, for example, there are fields for information like Invoice date and Due date.
But you can add up to three additional fields to sales forms. To do so, click the gear icon in the upper right corner of the screen and select Account and Settings, then click Sales in the vertical navigation bar on the left. The second block here contains Sales form content. Click Custom fields, and you’ll see something like this:
Click the word Off if it appears, and it will change to On and display three blank fields. Think carefully about what you would like to appear here, as this isn’t something you’ll want to change. If you haven’t yet met with us about how to set up QuickBooks Online, let’s schedule some sessions to go over all your setup procedures, including custom fields.
Enter the words or phrases you want displayed on sales forms in the three fields. Then decide whether you want them to be visible only to you and your accounting staff or to your customers, too. Click within the Internal and Public to create check marks. When you’re done, click Save.
Additional Categorization with Classes
QuickBooks Online’s classes provide another way to categorize transactions. You can use them to differentiate between, for example, departments or divisions. If you’re a construction company, you might have different classes for New Construction and Remodel. Unlike custom fields, you’re not limited to three classes.
You can filter many reports by class. QuickBooks Online contains report templates designed specifically for reporting by class, like Sales by Class Detail, Purchases by Class Detail, and Profit and Loss by Class.
Here’s how you create your own list. Click the gear icon in the upper right of the screen and select Account and Settings. Then click Advanced in the left vertical navigation toolbar. Under the fourth heading, Categories, you’ll see Track classes. If the word “Off” appears to the right, click in the box to turn this feature on. A box like this will appear:
Even if you’ve defined a number of classes, they’re not required on transactions. If you want to be reminded should you forget to classify one, click in the box in front of Warn me when a transaction isn’t assigned a class. You can also choose to assign one class to an entire transaction or to each individual row. Click the arrow to the right of One to entire transaction to drop the option box down and make your choice. When you’re done, click Save.
You can create classes as you’re entering transactions by clicking the arrow next to Class over to the right of the screen and selecting +Add new. We recommend, though, that you think this through ahead of time and make at least an initial list by clicking the gear icon in the upper right and choosing All Lists, then Classes, then New.
These are two of the customization tools that are built into QuickBooks Online. Whether you’re just getting started or you’ve been using the site for a while, Dagley & Co. can introduce you to all the ways that you can make QuickBooks Online your own.
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Business owners and employees often use the standard mileage rate when taking a deduction for the business use of their vehicle. The standard mileage rate is determined annually by the IRS by using data based on the prior year’s costs. For 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is 53.5 cents per mile for business miles driven, down from 54 cents for 2016. Operating expenses include:
- Vehicle registration fees
- Straight line depreciation (or lease payments)
What business owners using the standard mileage rate frequently overlook is that parking and tolls, as well as state and local property taxes paid for the vehicle and attributable to business use, may be deducted in addition to the standard mileage rate.
Regardless of whether the standard mileage rate or actual expense method is used, a self-employed taxpayer may also deduct the business use portion of interest paid on an auto loan on their Schedule C. However, employees may not deduct interest paid on a consumer car loan.
If you have questions related to taking a tax deduction for the business use of your vehicle, please give Dagley & Co. a call.
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Are you a childcare provider? If so, did you know are certain tax laws that provide you and your business with special tax breaks? These breaks include deductions for travel, capital purchases, supplies, children’s meals and the business use of your home. Dagley & Co. has broke down each tax break category for you:
Travel – Your auto expenses are based on the number of qualified business miles that you drive. Auto expenses for you (as a day care provider) could include transportation:
- To and from a class taken to enhance your day care skills;
- For field trips with those for whom you are providing care;
- For errands related to day care business (e.g., going to the bank to deposit day care receipts or to the store to shop for day care supplies); or
- To chauffeur day care attendees.
To claim business use of your vehicle, use the actual expense method or the standard mileage rate. However, the actual method requires far more detailed records; you must keep track of your business miles and total miles to prorate the costs of fuel, insurance, repairs, etc. You will probably find the standard mileage rate to be far less complicated, as you only need to contemporaneously record your business miles and the purpose of each trip. Even with the standard method, you’ll still need to know the total miles driven for the year. For 2017, the rate is 53.5 cents per mile, down from 54.0 cents per mile in 2016.
Capital Purchases – Capital items are those that normally last more than one year, including cribs and playground equipment. Be sure to keep receipts for these items, as they can generally be depreciated or expensed, whichever works best for you.
Supplies and Business Expenses – The cost of items such as crayons, coloring books, paper plates, cups, cleaning supplies, and first aid supplies are also deductible in the year they are purchased. However, you need to keep receipts for all such purchases.
Food – You can also deduct the actual cost of any food that is provided to the children in your care. It can be a bookkeeping nightmare to keep track of which grocery items were purchased for the childcare business and which were for personal consumption. Luckily, the government allows a care provider to deduct standard meal rates in lieu of actual amounts. This method does not require you to keep grocery receipts, and the IRS will not contest a food deduction based on the standard rates. The rates are the same throughout the contiguous U.S. states, with higher allowances for Alaska and Hawaii.
Year State Breakfast Lunch Dinner Snack 2016 ContiguousAlaska
Business Use of the Home – Generally, when a taxpayer claims a business deduction for the use of his or her home, the portion of the home that is used must be exclusively used for business purposes. Knowing that childcare providers do not use a specific space in the home 100 percent of the time, Congress added an exception related to the business’s licensing, certification, registration, or approval as a day care center or family/group care home under the provisions of any applicable state law. This exception applies only if the childcare owner or operator has applied for, been granted, or is exempt from such approval. In addition, the exception does not apply if the services performed are primarily educational or instructional in nature (e.g., musical instruction). However, the exception does apply if the services are primarily custodial, such that any educational, developmental or enrichment activities are only incidental to the custodial services. The services must be provided for adults age 65 or older, children, or other individuals who are physically or mentally incapable of caring for themselves.
When calculating the percentage use of a home for business, there are two factors: the space used to operate the day care business and the amount of time that the space is used to provide day care, including preparation and cleaning time.
Example – Edna uses her living room, kitchen, and bathroom ten hours a day, five days a week to provide licensed day care services. The home is 2,400 square feet, and the living room, kitchen, and bathroom are a combined 1,400 square feet. Edna’s percentage use of her home for business is determined as follows:
Edna’s Home Use Expenses (full year)
Homeowner’s Insurance 550
Mortgage Interest 6,150
Property Tax 2,550
Business Deduction $2,514 (.1736 x $14,480)
There is also a simplified deduction method for the business use of a home; it may be useful for individuals who work from a home office, but it is generally unsuitable for a childcare business.
The deduction for the business use of a home is limited to gross income from the business. If that limit applies to you, any home mortgage interest and property taxes that you have paid, as well as any casualty losses that you have incurred for the year, are always deductible when you itemize deductions, regardless of whether you claim a deduction for the business use of the home.
If you have questions related to how any of these tax breaks apply to you and your childcare business, please give Dagley & Co. a call.
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